Investment Incentives and Auction Design in Electricity Markets

Maria-Angeles de Frutos, Natalia Fabra () and Nils-Henrik M. von der Fehr

No 6626, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Motivated by the regulatory debate in electricity markets, we seek to understand how market design affects market performance through its impact on investment incentives. For this purpose, we study a two-stage game in which firms choose their capacities under demand uncertainty prior to bidding into the spot market. We analyse a number of different market design elements, including (i) two commonly used auction formats, the uniform-price and discriminatory auctions, (ii) price-caps and (iii) bid duration. We find that, although the discriminatory auction tends to lower prices, this does not imply that investment incentives at the margin are poorer; indeed, under reasonable assumptions on the shape of the demand distribution, the discriminatory auction induces (weakly) stronger investment incentives than the uniform-price format.

Keywords: electricity; investment; market design; regulatory reform; uniform price and discriminatory auctions (search for similar items in EconPapers)
JEL-codes: D44 L10 L5 L94 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-com, nep-ene and nep-mic
Date: 2008-01
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